China removes 75% cap on loan-to-deposit ratio

Facing economic downturn, China on Saturday removed 75 per cent loan-to-deposit ratio stipulation for its commercial banks to improve liquidity and imposed $2.5 trillion as ceiling for local Governments to control the spiralling debt.National People's Congress (NPC), China's legislature, adopted an amendment to the law on Commercial Banks, removing a 75 per cent loan-to-deposit ratio stipulation.

The ratio will instead be regarded as liquidity-monitoring indicator, state-run Xinhua news agency reported.China has kept the 75 per cent ratio since the law was enacted and put into effect in 1995. The amendment will take effect on October 1.“The ratio was set to prevent over quick expansion of commercial banks' credit scale and control liquidity risk, but it has become improper for current needs,” said Shang Fulin, chairman of the China Banking Regulatory Commission.

In another crucial policy move, the NPC also imposed a ceiling of 16 trillion yuan ($2.505 trillion) for local Government debt in 2015. It consists of two parts, 15.4 trillion yuan of debt balance owned by local governments by the end of 2014 and the remaining 0.6 trillion yuan the maximum size of debt local governments are allowed to run up in 2015. China has struggled for years to rein in local government debt.